S&P GLOBAL Ratings has upgraded its risk assessment on the Philippine banking industry, supported by the sector’s improved credit fundamentals.
The credit rater said it upgraded its Banking Industry Country Risk Assessment (BICRA) score for the domestic banking industry to “6” from the previous “7.”
“We revised our Banking Industry Country Risk Assessment (BICRA) on the Philippines to group ‘6’ from group ‘7’ due to the sector’s improved credit fundamentals,” S&P said in a May 14 report.
S&P uses its BICRA framework to evaluate and compare global banking systems. Scoring is done on a 1-to-10 scale, with 1 being the best score or those with the lowest risks.
The debt watcher said credit risk in the Philippines has lessened on the back of “the establishment of credit bureaus and the banks’ improving underwriting practices in the consumer loans segment.”
It cited the state-led Credit Information Corp. (CIC), a centralized public credit registry, which is mandated to collect credit-related data from financial institutions and other potential sources of credit information.
“Better data availability of credit history is positive for this segment where credit quality has historically been constrained by lack of information,” the debt watcher said, adding that clarity on creditworthiness should also foster risk-based pricing.
The report noted that CIC will strengthen the underwriting standards in the consumer lending segment, leading to better transparency which will lower banks’ consumer nonperforming loans (NPLs).
S&P said local banks have been expanding their consumer loan portfolios for higher margins even as the retail segment is likely to have higher delinquencies. However, banks’ NPLs have been declining, standing at 3.9% as of end-2017 versus 2013’s 5.3%.
“The narrowing of the gap with total NPLs points to banks’ gradually refining their risk management practices in this segment and making better lending decisions,” S&P added.
It also noted consumer lending still forms a small portion of the domestic banks’ loan portfolios, cornering 17.6% of the total, although growing from 2013’s 16% share.
On the corporate lending side — which S&P said constitutes about 80% of banks’ total loans — strong economic growth, low interest rates as well as adequate liquidity will continue to support the debt-servicing capacity of corporate borrowers.
It added that the credit losses of the banking industry from the corporate sector will likely remain subdued.
“Diminished risks from the consumer segment along with sustained credit performance of the corporate segment should support the favorable asset quality trends at Philippine banks,” S&P added, noting that this underpins its stable trend on the economic risk.
Last month, S&P revised the country’s ratings outlook to “positive” from “stable” as it expects improved fiscal policies to support more sustainable public finances and balanced growth.
The Philippines currently holds a “BBB” rating from S&P, a notch above the minimum investment grade.
BANK RATINGS
S&P also hiked its ratings for Security Bank Corp., while affirming that for the Development Bank of the Philippines (DBP) following its upgrade of the Philippine banking industry’s credit risk assessment.
In a statement sent to reporters late Monday, the global debt watcher upgraded Security Bank to investment grade, raising the lender’s long-term issuer credit rating to “BBB-” from “BB+,” with a “stable” outlook. Its short-term credit rating was also hiked to “A-3” from “B.”
Meanwhile, S&P affirmed DBP’s long-term credit rating at “BBB,” a notch above the minimum investment grade, and its short-term credit rating at “A-2.” It also maintained its “positive” outlook on the state-owned bank’s ratings.
In a May 14 report, S&P said it upgraded Security Bank’s long- and short-term credit ratings as reduced credit risk in the Philippine banking industry will strengthen the lender’s capital position and provide a solid buffer against potential losses.
“We expect Security Bank’s risk-adjusted capital ratio (RAC) to remain strong at 11-12% over the next two years,” S&P said, adding that although the lender’s RAC declined from 13.5% as of end-2017 due to the bank’s “above average credit growth.”
Security Bank is also expected to gradually upsize its market share over the next two years, with asset quality seen to come closer to the industry average as its loan book seasons.
“The stable outlook on Security Bank reflects our view that the bank will maintain its strong capital buffers and good asset quality over the next two years,” S&P added.
Central bank data show Security Bank was the sixth largest bank in the country in asset terms as of end-December 2017 with P755.77 billion.
Meanwhile, S&P said it believes the improvement of credit fundamentals in the Philippine banking industry will have a positive effect on the creditworthiness of DBP, revising its assessment on the state-run bank’s standalone credit profile to “bb” from “bb-.”
S&P said its credit ratings on DBP are in line with the sovereign’s as the government is likely to “provide timely and sufficient extraordinary support to the bank if needed.”
DBP’s capital position is seen to remain adequate over the next two years, with the credit rater forecasting a RAC ratio of 7-8%.
“We anticipate that DBP will maintain its market position over the next two years,” S&P said.
However, it added that the lender’s funding profile is constrained due to its policy role and smaller-than-average branch network.
Meanwhile, S&P’s “positive” outlook on DBP’s rating reflects mirrors that on the sovereign.
“We expect DBP to remain an important instrument for the government in its medium-term development strategy,” S&P said, adding that the lender is seen to sustain its public policy role over the next two years.
DBP was the eighth largest Philippine bank in asset terms at end-2017 with P597.05 billion. — Karl Angelo N. Vidal

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